Internet of Things: risks to fair competition lurk

Internet or Things (hereinafter ‘IoT‘ or ‘smart devices‘) is revolutionising in many sectors worldwide. IoT devices are characterised by the fact that they are connected to a network and can be controlled remotely, for example via voice assistance and/or mobile devices, and can exchange data. The examples of smart devices are almost endless: self-driving cars; a smartwatch that provides insight into your athletic performance and offers tips to improve it; a patient who can leave the hospital sooner because he is monitored from a distance and can communicate directly with the hospital; the smart meter for electricity, water and gas; autonomous agricultural machines that work the land and inform the farmer about the harvest. It is clear that it is almost impossible to imagine our daily lives without IoT.

As IoT becomes part of our daily lives more and more, the topic has also been put high on the agenda of the European Commission (“Commission“). One of the Commission’s focus points in the field of IoT is the creation of a single market  for IoT. To achieve this, in 2020 the Commission launched a sector inquiry on competition in the consumer IoT sector.

On 9 June, the Commission published a preliminary report (“the report“). The report discusses the preliminary findings on the competition parameters, the main developments and the identified competition risks in the IoT sector. The findings of the Commission are relevant for smaller market players that (want to) offer IoT products and will be discussed in this blog.

Reason for starting a sector inquiry and its scope

Global consumer IoT revenue is expected to grow from EUR 107 billion in 2019 to around EUR 408 billion in 2030. The market is still developing, yet there are already indications of barriers to entry and some companies may be limiting competition. The sector inquiry identifies these problems. In addition, the choice of the sector inquiry fits well within the Commission’s 2019-2024 strategy entitled ‘A Europe Fit for the Digital Age‘.

The preliminary findings of the sector inquiry are based on the information provided by more than 200 different stakeholders from Europe, China and the United States who are active in the IoT consumer sector, including smart device manufacturers, providers of voice assistants and consumer IoT services and industry associations. Furthermore, these companies have shared more than 1,000 agreements with the Commission.

IoT for industrial products and connected cars are outside the scope of the market investigation. One of the specificities of consumer IoT is that the data collected by the smart devices usually includes personal data.

Entry barriers

According to the respondents, the main barriers to entry in the market are:

• Investment in technology. According to the respondents, the cost of investing in technology is high, especially in the market for voice assistants.
• Current competition situation. With regard to the competitive situation, the respondents note that it is difficult to compete with vertically integrated companies that have built their own ecosystems inside and outside the consumer IoT sector (e.g. Google, Amazon or Apple). It is also considered unlikely that new entrants will emerge in the field of voice assistants in the short term, as the costs of developing voice assistants are high.
• Interoperability. The various IoT devices are often only useful if the data collected can be combined with other data. This requires data interoperability. The main providers of voice assistants and mobile devices are usually also the parties with their own technology that enables interoperability between the various IoT products. Providers of IoT products are therefore often dependent on these parties for interoperability. Respondents indicate that the different integration requirements of technology platforms lead to additional complexity for IoT providers when integrating their products.
• Access to data. Providers of IoT products and services collect a lot of data. For example, a smartwatch collects information about the health, location and movement patterns of consumers. With the data collected, providers of IoT devices can respond to the needs of their consumers and further develop the product. Respondents note that they encounter obstacles in accessing data. This is caused, among other things, by differences in the formats in which data is collected and by limitations in data portability.

It is also notable that the price of the products was identified as a less important competition parameter, although it is still considered relevant.

Identified competition risks

Remote control is essential for smart devices. To achieve remote control, manufacturers of smart devices often use voice assistance and/or a mobile device. The main voice assistants in the EU are Amazon’s Alexa, Google Assistant and Apple‘s Siri. For mobile devices, Google’s Android and Apple’s iOS are the leading operating systems. The sector inquiry has shown that IoT providers are generally dependent on providers of voice assistants and (the operating systems) of mobile devices and that supply is limited. This leads to the following competition risks:

• Exclusivity and tying in voice assistants. The sector inquiry shows that the main providers of voice assistants are attempting to achieve exclusivity of voice assistants on certain IoT devices. Practices that limit the possibility of using different voice assistants on the same smart device are also reported. Smart device manufacturers are also concerned that voice assistant providers are bundling different types of software and technology, including voice assistants.
• Pre-installation, defaults and prominence. Respondents indicate that the leading providers of voice assistants and/or mobile devices pre-install, set as default or otherwise give prominence to their own services or the services of major international players on the smart device. This can create a competitive advantage for the provider of a service that is preinstalled to the detriment of often smaller and/or local players.
• Data. Voice assistants are at the centre of data collection in the IoT consumer sector. This enables the leading voice assistant providers to collect large amounts of data, allowing them to not only manage data flows and user relationships, but also to leverage on adjacent markets. With access to large amounts of data, voice assistant vendors can improve their technology through algorithmic training and machine learning. This leads to improvements in the quality of voice assistance. Not having this large-scale access to data can create barriers for new entrants to the voice assistant market.
• Standardisation and interoperability. The major providers of voice assistants and mobile devices have the technology that enables interoperability. These providers can unilaterally control the interoperability and integration processes. They are thus able to limit the functionalities of IoT devices and services to the advantage of their own services.

What can we expect from the Commission in the field of IoT?

The results of sector inquiries of the Commission often lead to formal investigation into individual companies. For example, the E-commerce sector enquiry resulted in many formal investigations and substantive fines for companies such as Asus, Philips, Pioneer, Guess, Sanrio, Nike, NBC Universal Studio and several video game publishers . Similarly, the sector inquiry into the pharmaceutical industry resulted in significant fines at the European level for, among others, Lundbeck, Jansen-Cilag and Servier and at the national level in fines for, among others, GlaxoSmithKline and Pfizer/Flynn (UK), Aspen (Italy) and CDPharma (Denmark).

It is to be expected that the Commission will initiate formal investigations as a result of its findings in the IoT sector. In describing the competition risks identified in the report, the Commission does not appointed not explicitly the parties that may restrict competition. The Commission mentions, among others, ‘leading players in the field of voice assistants and/or mobile devices’ and ‘IoT technology platforms’. However, it is not hard to understand that the Commission is referring to major players such as Google, Amazon and Apple since they are by far the largest parties offering the services and the Commission also refers to these parties more often in the report. The most obvious course of action is for the Commission to open a formal investigation into abuse of a dominant position against one or more of these parties on the grounds of, for example, exclusivity, tying and/or self-preference.

It is also quite conceivable that the final report of the sector inquiry – which is expected in the first half of 2022 – will influence the ongoing debate on the Digital Markets Act (“DMA“) proposal and ex ante regulation. The proposed obligations in the DMA largely address the identified competition risks in the IoT sector. Should Google, Amazon and Apple be designated as gatekeepers under the DMA, the obligations imposed in the DMA such as prohibition of bundling, access to non-public data and self-preferencing could partially eliminate the identified competition risks. For a discussion on ex-post enforcement and ex ante regulation in the proposed Digital Markets Act, see our blog of 24 June “The Digital Markets Act (DMA): an effective means of regulating Big Tech? ”

Although IoT for industrial products and connected cars fall outside the scope of the sector inquiry, it cannot be ruled out that in these sectors similar competition problems arise as in consumer IoT. Technology, data access and interoperability also play an important role in these sectors. The existence of dominant players should be assessed on a market-by-market basis. With regard to connected cars, there are indications that Nokia, among others, is a leading player. Since 2018, five formal complaints for abuse of a dominant position have already been submitted to the Commission by various parties against Nokia, but no formal investigation has been launched to date. For example, car manufacturer Daimler, among others, turned to the Commission complaining that Nokia is abusing its dominant position due to the licensing of patents essential for technology standards for connected cars. Daimler also initiated civil proceedings in Germany and the German court referred questions to the Court of Justice for a preliminary ruling. The preliminary question was eventually withdrawn because the parties settled the case in June.

We advise smaller market parties that (want to) offer IoT products to be alert to the competition risks described in the report. Market parties can comment on the report until until 1 September 2021. If market participants encounter competition problems in the IoT consumer sector or beyond, they can also file a complaint with the Commission or a national competition authority. It is also advisable to seek legal advice from a competition lawyer.

If you have any question please do not hesitate to contact Bas Braeken or Lara Elzas